PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL
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PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 1
MAIN REVENUE TAXES
• Corporate income tax
- Name: Imposto sobre o Rendimento das Pessoas Colectivas
- Rate: 21% + 1,5% municipal surcharge + 3%, 5% or 9% state surcharge
- Law:
Decree-Law 442-B/88 of 30 November 1988, republished by Law 2/2014 of 16 January 2014 (CIT Code). Decree
Law 215/89 of 1 July 1989 (Tax Benefits Statute)
• Personal income tax
- Name: Imposto sobre o Rendimento das Pessoas Singulares
- Rate: (i) general: 14,5% to 48% + 2,5% to 5%; (ii) passive income: 28% or 35%; (iii) Non-habitual residents: 0%,
20%, 28% or 35%
- Law: Decree-Law 442-A/88 of 30 November 1988 (PIT Code)
• Non residents income tax
- Name: Imposto sobre o Rendimento das Pessoas Colectivas or Imposto sobre o Rendimento das Pessoas
Singulares
- Rate: (i) general: for individuals: 28%; for corporations: 25%; (ii) dividends: 0%, 25% or 35%; (iii) interest: 0%,
25% or 35%; (iv) royalties: for individuals: 0% or 28%; for corporations: 0% or 25%
TAX AUTHORITIES: AUTORIDADE TRIBUTÁRIA E ADUANEIRA - TAX AND CUSTOMS
AUTHORITY “ATA”
• Web page: http://www.portaldasfinancas.gov.pt/at/html/index.html
SEARCH TOOL FOR PORTUGUESE DOUBLE TAX TREATIES
• ATA
- Webpage:
http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/convencoes_evitar_dupla_tributacao/convencoes_tabelas_do
clib /
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 2
SEARCH TOOL FOR PORTUGUESE LAWS
• Diário da República (Official Gazette)
- Webpage: https://dre.pt/
• Procuradoria Geral da República (Public Prosecutor’s Office)
- Webpage: http://www.ministeriopublico.pt/iframe/pesquisarPRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 3
CONTENTS
1. SUMMARY OF MAIN TAXES ............................................................................................................................................. 6
1.1 Direct taxes ......................................................................................................................................................................... 6
1.1.1 Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Colectivas - “CIT”)..................................................... 6
1.1.2 Personal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares - “PIT”) ...................................................... 6
1.1.3 CIT or PIT for non-resident investors: ................................................................................................................................. 6
1.2 Indirect taxes ....................................................................................................................................................................... 7
1.2.1 Value Added Tax (Imposto sobre o Valor Acrescentado - “VAT”) ....................................................................................... 7
1.2.2 Real Estate Transfer Tax (Imposto Municipal sobre as Transmissões Onerosas de Imóveis - “IMT”) ............................... 7
1.2.3 Stamp Tax (Imposto do Selo) .............................................................................................................................................. 7
1.2.4 Municipal Property Tax (Imposto Municipal sobre Imóveis - “IMI”) ..................................................................................... 8
1.2.5 Additional Municipal Property Tax (Adicional ao Imposto Municipal sobre Imóveis – “AIMI”) ............................................. 8
1.2.6 Customs Duty ...................................................................................................................................................................... 8
1.3 Other relevant taxes ............................................................................................................................................................ 8
2. GENERAL BACKGROUND................................................................................................................................................ 9
2.1 Interpretation of the tax law ................................................................................................................................................. 9
2.2 Anti-abuse rules .................................................................................................................................................................. 9
2.3 Statute of limitations ............................................................................................................................................................ 9
2.4 Penalties ............................................................................................................................................................................ 10
2.5 Tax fraud ........................................................................................................................................................................... 10
3. MAIN INTERNATIONAL TAXATION RULES .................................................................................................................. 11
3.1 Double Tax Treaties (“DTT”) ............................................................................................................................................. 11
3.2 Elimination of double taxation............................................................................................................................................ 11
3.2.1 Participation exemption on dividends ................................................................................................................................ 11
3.2.2 Participation exemption on capital gains ........................................................................................................................... 11
3.2.3 Domestic relief ................................................................................................................................................................... 12
3.3 Transfer pricing.................................................................................................................................................................. 12
3.4 CFC rules .......................................................................................................................................................................... 12
4. ONGOING TAXATION OF A COMPANY ......................................................................................................................... 13
4.1 CIT ..................................................................................................................................................................................... 13
4.1.1 General .............................................................................................................................................................................. 13PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 4 4.1.2 Tax year ............................................................................................................................................................................ 13 4.1.3 Rates ................................................................................................................................................................................. 14 4.1.4 Expenses ........................................................................................................................................................................... 14 4.1.5 CIT autonomous taxation .................................................................................................................................................. 14 4.1.6 Financial expenses ............................................................................................................................................................ 15 4.1.7 Tax losses ......................................................................................................................................................................... 15 4.1.8 Tax consolidation regime .................................................................................................................................................. 16 4.1.9 CIT payments .................................................................................................................................................................... 17 4.1.10 Withholdings ...................................................................................................................................................................... 17 4.2 Withholding taxes on payments made to employees and independent professionals ...................................................... 18 4.3 Withholding taxes on payments to non-residents .............................................................................................................. 18 4.3.1 Dividends ........................................................................................................................................................................... 18 4.3.2 Interest .............................................................................................................................................................................. 18 4.3.3 Royalties ............................................................................................................................................................................ 19 4.3.4 Services ............................................................................................................................................................................. 19 4.4 Taxes on the sale and transfer of a company’s assets ..................................................................................................... 20 4.4.1 CIT ..................................................................................................................................................................................... 20 4.4.2 VAT ................................................................................................................................................................................... 20 4.4.3 Real Estate Transfer Tax (IMT) ......................................................................................................................................... 21 4.4.4 Stamp Tax (Imposto do Selo) ............................................................................................................................................ 21 4.4.5 Municipal Property Tax (IMI) ............................................................................................................................................. 21 4.4.6 Additional Municipal Property Tax (AIMI) .......................................................................................................................... 21 5. FOREIGN INVESTMENT .................................................................................................................................................. 22 5.1 Commercial and legal opening for foreign investment ...................................................................................................... 22 5.2 Foreign investors domiciled in tax havens......................................................................................................................... 22 6. ELECTING THE INVESTMENT VEHICLE ....................................................................................................................... 22 6.1 Investment vehicles commonly used and main differences; general rule and recommendation....................................... 22 6.1.1 Sociedades Anónimas ....................................................................................................................................................... 22 6.1.2 Sociedades por Quotas ..................................................................................................................................................... 23 6.2 Other forms of entities ....................................................................................................................................................... 23 6.3 Tax transparent entities ..................................................................................................................................................... 23 6.4 Other vehicles with tax benefits ......................................................................................................................................... 24
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 5 6.4.1 Securities investment funds............................................................................................................................................... 24 6.4.2 Real estate investment funds ............................................................................................................................................ 24 6.4.3 Madeira Free Trade Zone ................................................................................................................................................. 24 7. INVESTMENT PROCEDURES AND FORMALITIES ....................................................................................................... 26 8. FINANCING THE INVESTMENT VEHICLE...................................................................................................................... 26 8.1 Equity ................................................................................................................................................................................ 26 8.2 Debt ................................................................................................................................................................................... 26 8.3 Recommendation on the form and proportion of financing................................................................................................ 28 9. DIVESTMENT ................................................................................................................................................................... 28 9.1 Share capital reductions and reimbursement to shareholders .......................................................................................... 28 9.2 Capital gains ...................................................................................................................................................................... 28 9.3 Indirect capital gains .......................................................................................................................................................... 28 10. CORPORATE REORGANISATION.................................................................................................................................. 29 10.1 Main tax rules affecting mergers, divisions, exchanges and transfer of assets................................................................. 29 10.2 Tax neutrality regime for corporate reorganisations .......................................................................................................... 29 11. NON-HABITUAL RESIDENTS REGIME .......................................................................................................................... 29 WORKING GROUP ........................................................................................................................................................................ 31
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 6
1. SUMMARY OF MAIN TAXES
1.1 Direct taxes
1.1.1 Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Colectivas - “CIT”)
• Tax base: worldwide income of legal entities resident in Portugal for tax purposes.
• Rates:
- General: 21%; a municipal surcharge of up to 1.5% of taxable profits could be added. The following state surcharges
also apply: 3% of a taxable profit ranging between EUR 1.5 M and EUR 7.5 M; 5% of a taxable profit ranging between
EUR 7.5 M and EUR 35 M; and 9% of a taxable profit exceeding EUR 35 M.
- Securities Investment Funds and Real Estate Investment Funds (or companies): 21%. However, as a general rule,
investment income, rental income and capital gains are exempt from CIT.
• Law:
- Decree-Law 442-B/88 of 30 November 1988, republished by Law 2/2014 of 16 January 2014 (CIT Code).
- Decree Law 215/89 of 1 July 1989 (Tax Benefits Statute).
1.1.2 Personal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares - “PIT”)
• Tax base: worldwide income of individuals resident in Portugal for tax purposes.
• Rates:
- General: progressive PIT rates which range from 14.5% to 48%, plus (i) an additional surcharge of 2.5% of taxable
income ranging between EUR 80,000 and EUR 250,000 and 5% of taxable income exceeding EUR 250,000Passive
income (dividends, interest, capital gains, rental income): 28% (35% for sourced income from listed tax havens).
• Non-habitual residents: eligible income exempt or subject to PIT at 20%. Law:
- Decree-Law 442-A/88 of 30 November 1988 (PIT Code).
1.1.3 CIT or PIT for non-resident investors:
• Tax base: income earned in Portugal.
• General rates:
- PIT: 28%.
- CIT: 25% (35% for payments made to entities resident in listed tax havens).
• Law:
- PIT and CIT Code.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 7
1.2 Indirect taxes
1.2.1 Value Added Tax (Imposto sobre o Valor Acrescentado - “VAT”)
• Tax base: sale of goods, imports and supplies of services carried out by VAT taxable persons. Generally recoverable by
the taxable person.
• Rates:
- General: 23%.
- Intermediary: 13% (e.g. restaurants).
- Reduced: 6% (e.g. essential goods).
• Law:
- Decree-Law 394-B/84 of 26 December 1984 (VAT Code).
1.2.2 Real Estate Transfer Tax (Imposto Municipal sobre as Transmissões Onerosas de Imóveis - “IMT”)
• Tax base: transfer of real estate property located in Portugal.
• Rates:
- Up to 6.5% for urban property.
- 5% for rural property.
- 10% if the acquirer is a company resident in a listed tax haven.
• Law:
- Decree-Law 287/2003 of 12 November 2003(IMT Code).
1.2.3 Stamp Tax (Imposto do Selo)
• Tax base: all acts, contracts, documents, instruments and other taxable events set out in the Stamp Tax Code that take
place in Portugal, i.e. credit transactions, guarantees, transfer of real estate.
• Rates:
- From 0.04% to 0.6% on loans and guarantees, depending on the respective term.
- 0.8% for the transfer of real estate.
• Law:
- Decree-Law 287/2003 of 12 November 2003 (Stamp Tax Code).PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 8
1.2.4 Municipal Property Tax (Imposto Municipal sobre Imóveis - “IMI”)
• Tax base: holding of real estate located in Portugal.
• Rates:
- 0.8% for rural property.
- From 0.3% to 0.45% on urban property (determined annually by the municipalities).
• Law:
- Decree-Law 287/2003 of 12 November 2003 (IMI Code).
1.2.5 Additional Municipal Property Tax (Adicional ao Imposto Municipal sobre Imóveis – “AIMI”)
• Tax base: holding of land for construction or residential real estate located in Portugal.
• Rates:
- 0.4% on real estate owned by corporate entities.
- 0.7% on real estate owned by individuals, 1% on the taxable value between €1M and € 2M, and 1.5% on the taxable
value exceeding € 2M. The taxable value corresponds to the tax registered value of the real estate and individuals
benefit from a € 600,000 deduction from the total tax registered value corresponding to all real estate owned by the
individual.
• Law:
- Decree-Law 287/2003 of 12 November 2003 (IMI Code).
1.2.6 Customs Duty
• Tax base: imports of goods into the EU through Portuguese borders.
• Rates: variable in accordance with the Common Customs Tariff, depending on the goods and its origin. The tariffs may
be specific (by unit or quantity of goods), mixed or ad valorem.
• Law:
- The Customs Duty Law in force in Portugal follows EU Regulations. The most important regulations are (i)
Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the
Union Customs Code; (ii) Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 supplementing
Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning
certain provisions of the Union Customs Code, as amended by article 55 of Commission Delegated Regulation (EU)
2016/341 of 17 December 2015; (iii) Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015
with detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the European Parliament
and of the Council laying down the Union Customs Code.
1.3 Other relevant taxes
- Excise dutiesPRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 9
2. GENERAL BACKGROUND
2.1 Interpretation of the tax law
Interpreting the tax law and qualifying the facts to which the rules are applied should be done according to the general interpretation
rules and principles governing the interpretation of the law. If a certain concept from another field of law is used within the scope of
tax law, it must be interpreted in accordance with its own field of law. Any doubts should be interpreted in light of the economic
substance of the fact.
Tax rulings are also available. The main requirement for filing a ruling is that the request be filed with the proposal of the tax
framework applicable to the situation under analysis. Two types of rulings may be requested: (i) A regular ruling request (without
urgency), which has no associated costs but the tax authorities have an indicative timeframe of 150 days to decide. The failure to
meet the timeframe does not trigger any consequence. (ii) An urgent ruling, the urgency of which must be accepted by the tax
authorities. The costs may range between EUR 2,550 and EUR 25,500 depending on the complexity of the issue and it must be
decided within 90 days. If no decision is issued after 90 days, the tax framework proposed by the taxpayer should be considered
as tacitly accepted.
2.2 Anti-abuse rules
The Portuguese tax framework has a general anti-abuse rule according to which any act or transaction artificially or fraudulently
carried out for the purposes of reducing, avoiding or delaying the tax that would otherwise be due or to obtain a tax saving that
would not be achieved if the usual or correct action or transaction had been carried out, is to be deemed ineffective for tax purposes.
Further to the referred general anti-abuse rule, the CFC rules and the transfer pricing rules, there are also other anti-abuse
provisions on tax driven mergers, transfers of assets or exchanges of shares, as well as rules on payments made to entities resident
in low tax jurisdictions (denying the deductibility of certain expenses or the application of certain tax benefits).
2.3 Statute of limitations
In order to collect taxes, the tax authorities have to first issue a tax assessment before the end of the limitation period (caducidade).
As a general rule, the limitation period for tax authorities to issue assessments is four years from the relevant taxable event (in
some cases the limitation period begins to run from the end of the relevant tax period), except in the following cases:
• IMT and Stamp Tax on gratuitous transfers or transfers for consideration of real estate: eight years.
• If an error is detected in a taxpayer’s return or if the taxable income is determined using indirect methods: three years.
• If the taxpayer reports any deduction or tax credit, the limitation period is the term during which the relevant right can be
exercised.
• If a criminal inquiry is initiated and the assessment depends on the facts under investigation, the limitation period for
assessments is extended until one year after the end of the criminal proceedings (either upon the conclusion of the criminal
inquiry or the issuance of a final court decision on the criminal proceedings).
• If the facts are related to a listed tax haven and were not declared to the tax authorities, or if the facts are related to deposit
or securities accounts held in financial institutions outside the EU or in subsidiaries of resident financial institutions located
outside the EU, the existence and identification of which was not indicated by the taxpayer in the PIT return of the
respective year: twelve years.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 10
The limitation period for the tax assessment is suspended if the tax authorities initiate an external tax audit (carried out at the head
office or other premises of the taxpayer). This suspension does not apply if the tax audit is not concluded within six months (the
external tax audit is considered to be concluded when the taxpayer is notified of the final tax audit report).
There are several other rules regarding the suspension of the limitation period for the tax assessment. For example, if there is
pending litigation (irrespective of whether it is an administrative or a judicial claim) the limitation period for an assessment is
suspended from the date on which the claim is filed until the final decision is issued.
After the tax assessment is issued by the tax authorities, there is also a limitation period within which the tax authorities may collect
taxes (prescrição).
As a general rule, the limitation period to collect taxes is eight years (from the date on which the relevant taxable event takes place).
However, if the facts are related to a listed tax haven and were not declared to the tax authorities, or if the facts are related to
deposit or securities accounts held in financial institutions outside the EU or in subsidiaries of resident financial institutions located
outside the EU, the existence and identification of which was not indicated by the taxpayer in the PIT return of the respective year,
the limitation period to collect taxes is fifteen years.
2.4 Penalties
The Portuguese tax framework sets out a number of tax infractions for the late filing or fulfilment of tax obligations, the failure to
perform payments and the non-fulfilment of ancillary tax obligations. As a general rule, each infraction has a minimum and maximum
fine. Whenever the fine is for a legal entity, the fixed minimum and maximum amounts are doubled. The minimum fine is EUR 50
and the maximum is EUR 165,000 for infractions committed with wilful misconduct and EUR 45,000 for infractions committed with
negligence. It is possible to reduce the applicable penalty to: (i) 12.5% of the minimum amount, if a request for the early payment
of the fine is filed within 30 days from the commission of the offense or an audit procedure has begun; (ii) 25% of the minimum
amount, if a request for early payment of the penalty is filed before the procedure for the assessment of the penalty or an audit
procedure has begun; or (iii) 75% of the minimum amount if a request for the early payment of the penalty is filed before the end of
the audit procedure and the offence is negligence.
2.5 Tax fraud
Tax fraud is any illegal conduct carried out for the purpose of avoiding the assessment, delivery or payment of tax, or obtaining a
tax benefit, refund or other tax saving that reduces tax revenue through:
• The concealment or amendment of facts or amounts that should be recorded in the accounting books or the tax returns
submitted by the taxpayer and used by the tax authorities to assess and determine the taxable base;
• The concealment or amendment of facts or amounts that should be revealed to the tax authorities; or
• A sham transaction, whether in terms of its value or its nature or by means of the interposition, omission or substitution of
entities may qualify as tax fraud if the taxpayer obtains an unlawful profit of more than EUR 15,000. This amount is
calculated on the basis of each tax return and, if it is not reached, the conduct will constitute a tax offence rather than a
tax crime.
A corporate taxpayer convicted of fraud may face a monetary penalty of up to 360 days’ duration (each day may range between
EUR 5 and EUR 5,000). If certain conditions are met (such as the use of false invoices, or if an illegal conduct leads to an economic
profit in excess of EUR 50,000), the applicable penalty may be up to five years’ imprisonment or a penalty with a duration of 240 to
1,200 days (in the case of legal entities). If the illegal conduct causes an economic tax benefit in excess of EUR 200,000, the
applicable penalty will be two to eight years’ imprisonment, and a penalty of 480 to 1,920 days (in the case of legal entities).PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 11
3. MAIN INTERNATIONAL TAXATION RULES
3.1 Double Tax Treaties (“DTT”)
Portugal has a broad network of DTT; 77 DTTs in force (for example with Germany, Chile, China, Colombia, Spain, USA, France,
the Netherlands, Peru and the United Kingdom) and another four that have been signed but have not yet entered into force.
The full list can be found at:
http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/convencoes_evitar_dupla_tributacao/convencoes_tabelas_doclib/
3.2 Elimination of double taxation
3.2.1 Participation exemption on dividends
Dividends distributed to corporate entities resident in Portugal may be excluded from CIT, provided that the following requirements
are met:
• The beneficiary (which cannot be a tax transparent entity) directly and indirectly holds at least 10% of the share capital or
voting rights of the distributing entity.
• The relevant shares been held uninterruptedly for a one year prior to the distribution (or, if held for a shorter period, the
shareholder must commit to keep them until the end of the one year period).
• The distributing entity is not a corporate entity resident in a listed tax haven and is subject to and not exempt from CIT or
a tax referred to in the Parent-Subsidiary Directive or a similar income tax, with a rate not lower than 60% of the Portuguese
CIT rate in force (i.e. 12.6% for 2019) (“subject to tax” condition).
The participation exemption regime is not applicable to dividends deductible for tax purposes at the level of the paying entity.
Dividends distributed by a Portuguese resident company to: (i) a parent company resident in another EU Member State; (ii) a
company resident in an EEA State that is subject to exchange of information obligations similar to the obligations established by
the EU; (iii) a parent company resident in a country with which Portugal has a DTT that foresees exchange of information
procedures; or (iv) a PE located in another EU or EEA State that has its head office in another EU Member State, or an EEA State
that is subject to exchange of information obligations similar to the obligations established by the EU, or located in a country with
which Portugal has a DTT that foresees exchange of information procedures, are not subject to any taxation in Portugal (whether
withholding or final taxation), provided that, among other conditions, the non-resident shareholder holds a participation of at least
10%, for an uninterrupted period of 1 year, and both companies are subject to one of the taxes on profits listed in Article 2 c) of the
Parent-Subsidiary Directive or, in the case of companies resident in an EEA State or a country with a DTT, a similar income tax,
with a rate not lower than 60% of the Portuguese CIT rate in force (i.e. 12.6% for 2019).
3.2.2 Participation exemption on capital gains
Capital gains earned or losses suffered by resident companies as a result of a shareholding that complies with the requirements
mentioned above for the participation exemption on dividends may also be excluded from CIT.
The participation exemption regime will not apply to capital gains or losses arising from the transfer of a shareholding or other equity
instruments such as supplementary capital contributions in a subsidiary whose assets are directly or indirectly composed of more
than 50% of real estate located in Portugal, unless these assets are allocated to an industrial, commercial or agricultural activity
which does not consist in the purchase and sale of real property. Only real property purchased on or after 1 January 2014 is
considered for this purpose.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 12 3.2.3 Domestic relief A resident corporate entity obtaining foreign-source income is entitled to a direct tax credit equal to the lower of the following amounts: (i) the foreign tax paid; or (ii) the CIT due on that income (as computed before the credit is given), excluding all costs or losses directly or indirectly borne to obtain the income. The tax credit is assessed on a country by country basis, taking into account the income obtained in each country (excluding the income allocated to a PE of the Portuguese corporate entity, whose tax credit is calculated separately). In the case of income deriving from a country with which Portugal has entered into a tax treaty, the tax credit is limited to the amount of tax payable in the source country under the applicable tax treaty. Additionally, a resident corporate entity obtaining dividends and reserves abroad subject to CIT (not benefitting from the participation exemption regime) is entitled to an indirect foreign tax credit which allows a deduction equal to the lower of the following amounts: (i) a fraction of the foreign tax paid by the foreign entity distributing the dividends or by entities directly or indirectly held by the latter in proportion to the profits distributed or (ii) the CIT due on the distributed profits (as computed before the credit is given), excluding all costs or losses directly or indirectly borne to obtain the income and with the deduction of the direct tax credit mentioned above. The indirect foreign tax credit is only applicable if: (i) the beneficiary company directly or indirectly holds at least 10% of the share capital or voting rights of the distributing entity; and (ii) the relevant participation has been uninterruptedly held for one year prior to the distribution (or, if held for a shorter period, the shareholder commits to keep it until the one year period is completed). In any case, this regime will not be applicable if the foreign tax was paid by an entity resident in a listed tax haven or by an entity which is held by the Portuguese corporate entity through an entity resident in a listed tax haven. 3.3 Transfer pricing Under the Portuguese CIT Code, transactions carried out between related parties are valued at fair market value. A special relationship is deemed to exist if one entity is capable of directly or indirectly influencing, in a decisive manner, the management decisions of another entity (note that such capability is deemed to exist, in particular, between a resident company and its shareholders with a direct or indirect shareholding of at least 20%). Under the Portuguese transfer pricing rules, interest on loans obtained from related parties must be valued at arm’s length and properly documented. For this purpose, the CIT Code refers to the OECD transfer pricing methods of valuation. As a general rule, the arm’s length value in a transaction between related parties should be established under the comparable uncontrolled method, the resale method, or the cost plus method. Non-compliance with the arm’s length principle may result in adjustments to the reported taxable profits and the assessment of the respective tax, compensatory interest and penalties. Entities with a total income exceeding EUR 3 M must prepare a transfer pricing file evidencing the transactions carried out with related parties as well as the corporation’s transfer pricing policies. 3.4 CFC rules The Portuguese CFC rules may apply to the income earned by a non-resident entity which has a Portuguese resident entity as beneficiary or shareholder. A CFC is defined as a foreign entity that is subject to a “more favourable tax regime”, which is deemed to occur when: (i) it is resident in a country or territory listed as a tax haven; (ii) the income tax effectively paid is lower than 50% of the CIT which would be paid under the terms of the Portuguese CIT Code.
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 13
The CFC rules apply when a Portuguese resident corporate entity directly or indirectly holds (through a representative, fiduciary or
intermediary), at least 25% of the shares, voting rights or rights over the income obtained on the assets held by the CFC.
The CFC regime does not apply to legal persons resident in either the EU or in the EEA if the incorporation and activities of the
controlled entity are based on valid economic reasons and the entity carries out agricultural, commercial, industrial or service based
activities.
Companies resident outside of Portugal are also exempt from the CFC rules if the sum of the income arising from one or more of
the following categories does not exceed 25% of the company’s total income:
• Royalties or other income arising from intellectual property rights, image rights or similar rights.
• Dividends and income arising from the transfer of securities representing the share capital of a company.
• Income arising from financial leases.
• The leasing of assets, with the exception of real estate located in the country of residence of the non-resident corporation.
• Income arising from transactions commonly performed within banking activities (even if not performed by credit
institutions), insurance activities or other financial activities, which are entered into with related parties under the applicable
transfer pricing rules.
• Income arising from invoicing companies which obtain commercial and services income from goods and services bought
and sold from and to related entities under the applicable transfer pricing rules.
• Interest or other investment income.
4. ONGOING TAXATION OF A COMPANY
4.1 CIT
4.1.1 General
Portuguese resident companies are subject to CIT on their worldwide income from all sources, including capital gains.
The taxable income of Portuguese companies is based on their profit and loss (P&L) account drawn up in accordance with the
accounting rules (Portuguese GAAP, which are based on the International Accounting Standards - IAS), as adjusted in accordance
with the CIT Code.
4.1.2 Tax year
Under the CIT Code, as a general rule, the tax year is the same as the calendar year. However, tax resident entities in Portugal, as
well as permanent establishments (“PE”) of non-resident entities may choose a different tax year.
Entities that have changed their tax year to a period that does not correspond with the calendar year may not change the new tax
year for the next five tax periods. However, this restriction is not applicable when the relevant corporate entity forms part of a group
of companies, which is required to consolidate its accounts, and the parent company chooses a different tax year.
If an entity chooses to have a different financial and tax year for corporate and accounting reasons, it will have to have two separate
account closings, one for corporate and accounting purposes and another for tax purposes. It will also have to comply with its CIT
obligation deadlines based on its tax year, specifically the filing of tax returns and annual tax declarations. As a matter of practice,
the financial year therefore tends to be the same as the tax year.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 14
4.1.3 Rates
The standard CIT rate applicable to resident companies is 21%; a municipal surcharge (derrama municipal) of up to 1.5% of taxable
profits could be added (the municipal surcharge applicable is approved annually by each municipality). Furthermore, the following
state surcharges (derrama estadual) also apply: 3% of a taxable profit ranging between EUR 1.5 M and EUR 7.5 M; 5% of a taxable
profit ranging between EUR 7.5 M and EUR 35 M; and 9% of a taxable profit exceeding EUR 35 M. Both the municipal surcharge
and the state surcharge are levied on taxable profits before the deduction of carry forward losses.
4.1.4 Expenses
The Portuguese CIT Code establishes that expenses incurred by a company are deductible for CIT purposes if they are duly
documented and incurred or borne by the taxpayer in order to obtain or guarantee taxable income, namely: expenses relating to
the production or? acquisition of assets or services, distribution, transport, publicity and sale of goods and products, financial
expenses, administrative expenses (such as wages, subsistence allowances), depreciation, amortisation, impairment losses,
capital losses and tax and parafiscal tax (except income taxes).
The CIT Code also foresees that certain expenses are not deductible for CIT purposes, such as: the CIT itself and any other taxes
directly or indirectly levied on income, undocumented expenses, expenses documented by invoices that do not comply with the
legal requirements, illegal expenses, taxes and expenses which the taxpayer is not legally liable for, penalties and other charges,
expenses related to vehicles which exceed specific limits, the banking and energy sector contributions and amounts paid to entities
resident in a listed tax haven (as approved by Ministerial Order 150/2004 of 13 February), unless the taxpayer provides evidence
that the relevant amounts refer to an actual transaction and are not excessively high.
4.1.5 CIT autonomous taxation
The following expenses are subject to an autonomous CIT taxation, to be levied on the respective value and paid upon filing the
annual CIT return:
• Undocumented expenses (at 50% which increases to 70% for entities exempt or partially exempt from CIT, and entities
whose main activity is not a commercial, industrial or agricultural activity.
• Deductible representation expenses: 10%.
• Expenses relating to passenger vehicles, mixed passenger and goods carriage vehicles, and motorcycles (with the
exclusion of electric vehicles) with an acquisition cost of less than EUR 25,000: 10%; with an acquisition cost of between
EUR 25,000 and EUR 35,000: 27.5%; and vehicles with an acquisition cost of more than EUR 35,000 at 35%.
• Payments made to an entity resident in a listed tax haven, or in a country or territory in which it is not subject to an income
tax similar to PIT or CIT or where the income tax paid is less than 60% of the tax that would be due in Portugal if the
relevant entity were resident in Portugal, unless the paying company produces evidence that the payments relate to
transactions effectively executed; and the amount in question is not excessively high: 35%.
• Deductible expenses, subsistence allowances and other compensation paid to employees relating to the use of private
cars that are not charged to clients and not subject to taxation as employment income: 5%.
• Dividends distributed by a Portuguese resident company to an exempt or partially exempt entity that has held its
shareholding in the resident company for less than one year: 23%.
• Indemnities and any other compensation paid in the event of the termination of the appointment of managers or members
of the board of directors except: (i) the remuneration that the relevant manager or director would be entitled to receive upPRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 15
to the end of the term of their appointment (in the event of a dismissal prior to the end of the appointment term); and (ii)
any payments linked to productivity targets previously established: 35%.
• Premiums and other types of variable remuneration paid to a manager or director that represent more than 25% of their
annual salary and exceed EUR 27,500: 35%; unless the relevant payments are: (i) deferred to at least 50% for a minimum
of three years; and (ii) linked to the positive performance of the company during that period. If any of these conditions
cease to be fulfilled, the amount of independent CIT taxation which should have been assessed is added to the CIT in the
tax year in which the condition ceased.
The above tax rates are increased by 10% if the taxpayer has tax losses in the tax period in which the relevant expenses are
incurred.
4.1.6 Financial expenses
Financial expenses incurred in order to generate or guarantee income subject to CIT are tax deductible.
This means that the interest paid on financing obtained in order to refund equity or proceed with dividend distributions tend to be
considered as not being related to the activity of the company (i.e. not incurred to generate or guarantee income) and therefore as
non-deductible for tax purposes.
The net financing expenses are only deductible for CIT purposes for up to the highest of the following amounts: (i) EUR 1 M; or (ii)
30% of the Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”).
The tax concept of EBITDA used to calculate the abovementioned limits corresponds to the company’s taxable income or tax losses
subject and not exempt from CIT, added of net financing expenses, depreciation and amortization that are tax deductible.
The amount of net financing expenses which is not deductible as it exceeds the maximum limit for the relevant tax year can be
carried forward and deducted in the following five years (subject to the limit applicable in each year).
If during a given year, the net financing expenses are lower than the limit of 30% of the EBITDA of that year, the excess amount
within this limit (i.e. the difference between (i) 30% of the EBITDA; and (ii) the net financing expenses) could be offset against the
net financing expenses of the following five years.
4.1.7 Tax losses
Tax losses may be carried forward against the taxable income of the following five years, but only up to 70% of the taxable profit in
the year in which the tax losses are deducted (i.e. CIT will always be due on 30% of the taxable profit).
This five-year period is applicable only for the losses assessed in 2017 and subsequent years. The carryforward period is twelve
years for 2014, 2015 and 2016.
Tax losses are, as a general rule, forfeited when more than 50% of a company’s share capital or voting rights are transferred to
third parties, unless the change refers to:
• The transformation of a direct shareholding into an indirect shareholding or vice versa, or the change of ownership occurs
between companies more than 50% of which are directly or indirectly held by the same entity.
• A corporate reorganisation under the special tax neutrality regime.
• An inheritance.
• An acquirer which already held more than 20% of the share capital or voting rights since the beginning of the tax period
in which the relevant tax losses were incurred.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 16
• An acquirer which is an employee or a board member of the relevant company since the beginning of the tax period in
which the relevant tax losses were incurred.
If the change does not fall within any of the referred situations, the taxpayer may request an authorisation from the Ministry of
Finance to carry forward the accumulated losses against the taxable income of the following five years. Such authorisation will be
granted only if the relevant transaction is deemed to have a significant economic purpose. The company must file a petition with
the tax authorities, addressed to the Ministry of Finance within 30 days after the event that would prevent it from being able to offset
its accumulated tax losses.
4.1.8 Tax consolidation regime
A group of companies resident in Portugal meeting the applicable legal requirements may choose to be taxed on their aggregate
taxable basis. To qualify for the tax consolidation regime, the companies must fulfil the following conditions:
• The dominating company must directly or indirectly own 75% or more of the subsidiaries’ share capital, provided such
shareholding confers more than 50% of the voting rights.
• The office and effective management of all the companies must be in Portugal.
• The income of all the companies must be fully subject to the standard CIT regime at the higher tax rate (currently 21%).
• The dominating company must hold a shareholding in the subsidiaries for more than one year before the year in which
the regime starts to apply. This is not necessary in the case of subsidiaries incorporated by the dominating company less
than one year before the beginning of the regime. In addition, if the participation is acquired via a merger, division, etc.,
the period in which the merged or divided companies held the shareholding is taken into account to ascertain whether the
holding period requirement is met.
• Seventy-five per cent or more of the dominating company may not be directly or indirectly held by another Portuguese
company that holds more than 50% of its voting rights that is eligible for the tax consolidation regime.
• The dominating company cannot have waived the application of the tax consolidation regime in the previous three years.
Certain companies cannot be integrated into a group, such as: companies that are inactive for more than one year, dissolved, against
which a bankruptcy or special recovery proceedings have been initiated, companies with tax losses in the three tax years preceding the
tax year in which the regime will start to apply, unless the shareholding in such companies has been held for more than two years by the
dominating company and companies subject to a CIT rate lower than the standard CIT rate that do not waive the reduced CIT rate.
The taxable income of a group must be declared and assessed by the dominating company and corresponds to the arithmetical
sum of the taxable income and tax losses assessed by each company in the group in its individual CIT return amended, if necessary,
by the application of the limit on the deductibility of financial expenses applicable to tax groups should the relevant group elect to
apply such special regime. The municipal surcharge on the taxable income must be calculated individually by each company and
the dominating company and the subsidiaries are jointly liable for the payment of the group’s CIT, notwithstanding the subsidiaries’
right of recourse against the dominating corporation.
With reference to financial expenses, whenever there is a group of corporations, the above-mentioned limits are applied to each
company of the group individually considered, unless the dominating company of the group elects to apply the said limits to the net
financing expenses of the group (and not of each company of the group), in which case the financing expenses of the group are
deductible by up to EUR 1 M, regardless of the number of companies that form part of the group or, if higher, 30% of the total sum
of the Tax EBITDAs obtained by each of the companies in the tax group.
Specific rules also apply to the deduction of tax losses incurred by the group.PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 17 4.1.9 CIT payments CIT must be paid in three instalments (pagamentos por conta). Payments should be made in the seventh month, the ninth month, and by the fifteenth day of the twelfth month of the tax year in which the taxable income was generated. These payments on account are calculated based on the CIT paid in the previous tax year. If the total amount of payments on account made during the corresponding year is lower than the final CIT liability, the difference must be paid, together with filing the annual CIT return (Declaração Modelo 22), by the last day of the fifth month of the following tax year. Any excess payments on account over the final CIT liability will be refunded by the end of the third month following that in which the annual CIT return was filed. Except in the first two tax years of activity, a special payment on account (pagamento especial por conta) may have to be made during the third month (or in two instalments paid in the third and tenth months) of each tax year. The amount of this special payment on account is generally calculated as the difference between 1% of the company’s turnover in the previous tax year (subject to the following limits: (i) a minimum limit of EUR 850; (ii) a maximum limit of EUR 850 plus 20% of the excess over that amount up to the value corresponding to 1%, with an overall maximum limit of EUR 70,000) and the amount of advance payments made in the previous year. The special payment on account is credited against the final tax liability of the tax year in which it is paid and any excess can be carried forward for four years. Any excess after this period can only be refunded if the corporation is dissolved and liquidated and in other exceptional circumstances. If in the previous year the entities were subject to the state surcharge, three additional payments on account are due on the same dates as the advance instalments. The additional payments on account correspond to 2.5% of taxable income ranging between EUR 1.5 M and EUR 7.5M; 4.5% of taxable income ranging from EUR 7.5 M to EUR 35 M; and 8.5% of taxable income exceeding EUR 35 M, assessed in the previous year. 4.1.10 Withholdings Income paid to Portuguese resident entities is generally subject to withholding tax when considered to be earned in Portugal, namely: (i) royalties; (ii) capital investment income and rental income due from another resident corporate entity subject to CIT or an individual carrying out a business or professional activity that must keep accounting records; (iii) remuneration received as members of corporate bodies; (iv) income from sports and artistic activities due from another resident corporate entity subject to CIT or an individual carrying out a business or professional activity that must keep accounting records; and (vi) income from intermediation services and from other services rendered or used in Portugal, other than those concerning transport, communications and financial activities. As a general rule, the withholding tax levied on income paid to Portuguese resident corporate entities is levied at a 25% rate and is considered a payment on account of their final tax due. No withholding tax is due on the following types of income: (i) interest and other capital investment income paid to financial institutions except for dividends; (ii) interest or other similar income resulting from late payment or from the extension of the payment date of sales or services made/rendered by an entity subject to CIT; (iii) dividends paid to an entity that is entitled to the participation exemption; (iv) income (including dividends) paid to companies taxed under the tax grouping regime by another company in the same tax group, provided the income relates to a tax year in which the special tax regime was in force; (v) rental income paid to a company managing its own real property (provided it is not subject to the tax transparency regime) or a real estate investment fund; (vii) interest on shareholders’ loans, commercial paper or bonds paid to a company by a subsidiary in which the former holds (directly or indirectly) at least 10% of the voting rights in the subsidiary for at least one year; and (viii) any income earned by an entity exempt from CIT.
PRACTICAL TAX GUIDE: INVESTING IN PORTUGAL 18
4.2 Withholding taxes on payments made to employees and independent professionals
As a general rule, the income paid to dependant employees should be subject to withholding tax by the company at variable rates
depending on the respective amount, ranging up to 44.5% and the income paid to independent professionals should be subject to
25% withholding tax. Both withholding taxes are considered as a payment on account of the final tax due.
4.3 Withholding taxes on payments to non-residents
4.3.1 Dividends
As a general rule, dividends paid by Portuguese resident companies to non-resident entities are subject to 25% withholding tax.
The withholding tax rate on dividends applicable to non-resident entities may be reduced under an applicable DTT (generally
between 15% to 5%) if the beneficiary of the dividends provides the paying company with (i) a specific form (form 21 RFI), duly
certified by the tax authorities of the beneficiary’s country of residence or (ii) form 21 RFI (not certified) along with a certificate of
residence issued by the tax authorities of the beneficiary’s country of residence.
Furthermore, under the CIT Code, an exemption applies to dividends distributed by a Portuguese resident company to: (i) a parent
company resident in another EU Member State; (ii) a company resident in an EEA State that is subject to exchange of information
obligations similar to the obligations established by the EU; (iii) a parent company resident in a country with which Portugal has a
DTT that foresees exchange of information procedures; or (iv) a PE located in another EU or EEA State that has its head office in
another EU Member State, or an EEA State that is subject to exchange of information obligations similar to the obligations
established by the EU, or located in a country with which Portugal has a DTT that foresees exchange of information procedures,
are not subject to any taxation in Portugal (whether withholding or final taxation), provided that:
(A) Both companies are subject to one of the taxes on profits listed in Article 2 c) of the Parent-Subsidiary Directive or, in the
case of companies resident in an EEA State or a country with a DTT, a similar income tax, with a rate not lower than 60%
of the Portuguese CIT rate in force (i.e. 12.6% for 2019).
(B) The profit distribution does not result from the winding-up of the Portuguese corporation.
(C) The direct holding of the non-resident entity in the Portuguese company is at least 10%.
(D) An uninterrupted holding period of one year is completed before the distribution of the dividends.
(E) The non-resident entity provides evidence, prior to payment, that it qualifies for purposes of the Parent-Subsidiary Directive
or meets similar requirements, by way of a declaration issued and confirmed by the relevant tax authorities, which is valid
for one year.
Finally, where the income is paid or made available in an account opened in the name of one or more account holders, on behalf
of unidentified third parties, and the beneficial owner is not disclosed, or when the beneficiary is domiciled in a listed tax haven, a
35% withholding tax rate applies.
4.3.2 Interest
As a general rule, interest paid by Portuguese resident companies or by Portuguese permanent establishments of non-resident
entities is subject to 25% withholding tax (a withholding does not apply to interest paid to Portuguese resident credit institutions or
Portuguese permanent establishments of non-resident credit institutions). The obligation to withhold tax arises when the interest
becomes due and payable under the relevant contractual arrangements, irrespective of its effective payment and accrual.You can also read
